IFIs in Africa News Briefing

Issue #33

Tuesday, December 23, 2008

In this issue:


$5 billion in World Bank loans in the works for South Africa’s power utility

After initial rumors in mid-August that South Africa’s power company, Eskom, would turn to the World Bank Group for substantial financing, officials of the country’s Treasury department announced on December 3 that after a round of talks with Bank officials in South Africa, the Bank had offered $5 billion in loans to finance new power stations.

The news was confirmed the next day by the International Finance Corporation (IFC), the World Bank Group’s private sector division. Reuters quoted Saleem Karimjee, the IFC Manager for Southern Africa, “numbers to the extent of $5 billion over five years have been discussed, so that has been agreed in principle.”

The loan would complement a $500 million loan from the African Development Bank, secured in 2007. That loan to Eskom, a utility parastatal with a virtual monopoly on national power provision, was the largest ever made by the AfDB’s private sector window, and indeed constituted well over half of the increase (“a near-quadrupling”) the AfDB trumpeted for its private sector lending last year. Several recent reports have suggested that the AfDB may be willing to lend Eskom up to an additional $1 billion.

Karimjee cited the mining industry’s need for power as a crucial motivation for the IFC deal. Power shortages caused rolling blackouts across South Africa in early 2008, and Eskom says it needs to spend about $33 billion over the next five years to increase power production and avert further shortages.

It is not clear yet whether the entire loan would be through the IFC or partly through the public sector arm of the Bank. Indeed, Karimjee said, the deal is far from final, as the Bank Group may require government guarantees, and Treasury officials cautioned that approval from the institution’s board could take as long as 18 months.

It is also not clear what conditions would be placed on the loan – whether it would be a “blank check” for anything that Eskom needs as it wrestles with critical shortages, or come with clear guidelines for investment in renewable and clean energy. Karimjee said, “the details of to what use will the funds be put, how will they be structured, this is only beginning now. We can’t really say the World Bank will help Eskom build this power station or that power station.”

An article in the Financial Mail cites “industry sources” concerned about an extra $1 billion in costs Eskom will incur with IFI financing, owing to the institutions’ requirements for reduced emissions. The report does not explain how that figure was calculated.

Eskom’s current plans for power generation include a wind-farm, but at least 90% of its power is slated to come from coal. However, Eskom recently shelved plans to build a second nuclear plant, citing prohibitive costs. The World Bank says it does not fund or otherwise support nuclear energy.

The loan would almost certainly be the largest single IFI loan made in sub-Saharan Africa, by any gauge.

In Poznan, Poland, activists gathered for the conference of the UN Framework Convention on Climate Change at the time of the announcement, citing reports that the loan could support development of six coal-fired power plants, pointed out that it would also likely be the “most carbon intensive project ever undertaken.” Activists will undoubtedly be closely monitoring the climate impacts of the deal, especially as the World Bank promotes itself as part of the solution to the climate crisis. 

The deal will also be a rallying point for public-interest advocates in South Africa who have been fighting for greater public accountability at Eskom. In a statement last week, the Public Service Accountability Monitor demanded that the World Bank “make any loan to Eskom conditional on guarantees of meaningful public participation in the formulation of South Africa’s future energy policy.”



West African Gas Pipeline comes online at last

Reuters reports that the World Bank-supported West African Gas Pipeline (WAGP) at last delivered its first gas to Ghana on December 11. The 680 km pipeline stretches from Nigeria, where the natural gas is sourced from the oil- and gas- rich Niger Delta, across Benin and Togo to Ghana. Benin and Togo will each take relatively small amounts of the fuel, with the bulk going to the industrial centers of Tema and Takoradi in Ghana. The initial 30 million cubic feet of gas per day is expected to help address recent power shortages in Ghana, which have forced some companies to suspend operations.

Since construction began in 2005, the project has suffered repeated delays due to political instability in the Niger Delta, damage to the pipeline and, most recently, high levels of moisture in the gas. Many observers also attribute recent delays to political sensitivities surrounding the project, as many Nigerians have objected to the export of gas to its neighbors when less than 40 percent of Nigerians have access to the country’s notoriously unreliable supply of electricity.

Chevron and Shell together own over 50 percent of WAPCo, the project operator. Both the World Bank and its private insurance arm backed the project with guarantees, and the European Investment Bank provided a €75 million loan.

Meanwhile, the communities that were affected by the project have had their long-standing concerns validated by an independent investigation into the project. In April 2006, representatives of communities displaced by the pipeline in Nigeria submitted a complaint to the World Bank’s Inspection Panel, an independent complaint mechanism for project-affected people, over inadequate compensation, and the failure to consider impacts upstream of the pipeline where the gas is sourced and to demonstrate how it would reduce gas flaring as promised.

During its investigation, the Inspection Panel confirmed all of these key claims, documenting a number of policy violations that the Bank and WAPCo committed during project preparation and implementation. While the Bank’s management agreed with most of the Panel’s analysis, it flatly disagreed on one key point – whether impacts in the Niger Delta area where the gas is sourced should be considered part of the project despite the fact that a pre-existing pipeline delivers the gas from that area to western Nigeria. At a meeting to discuss the Inspection Panel case in August, this issue was not resolved, but the World Bank Board did approve an action plan to address other issues raised in the Panel’s report, including compensation due to resettled people who received a mere 10 percent of the value of their assets. A number of key policy violations remain unaddressed, however, including the continued lack of a land-for-land compensation option and viable livelihood restoration program.

The Panel also criticized the Bank for promoting the pipeline as a way to reduce gas flaring in the Niger Delta. Since at least the early 1990s, a pipeline had been held out as the solution to the constant flaring of huge amounts of gas near Delta communities. Because of the costs of converting the “associated gas” that is usually flared, the WAGP in the end will contribute only “modestly” to reductions in flaring. While the Panel found there were no formal commitments that the Bank could be held to, it also found inconsistencies in the way the Bank presented the project’s prospective impact on flaring, and attributed these to a desire to make the project more politically popular.

At the same time, unconfirmed reports of Chevron building a new, separate pipeline to provide gas to the WAGP have surfaced, for which WAPCo is reportedly actively acquiring new land around Badagry. Project observers have demanded that plans for any additional construction be developed in an open, transparent manner, and that it be done in accordance with the World Bank’s safeguard policies with a public environmental impact assessment.



Zambia dam among IFC’s first casualties of the financial crisis

According to Reuters, the World Bank’s private sector arm, the International Finance Corporation (IFC), reports that the proposed $1.5 billion Kafue Lower Gorge Dam in Zambia has been put on hold, as many investors shy away from major commitments in light of the financial crisis. While the IFC attributes the delay in part to technical considerations, the more likely scenario is that the precipitous drop in copper prices has caused financiers to reconsider.

Surging copper prices had been the primary rationale for pursuing the project, which is designed exclusively for use by foreign mining operators in Zambia’s copper belt. But demand for copper has plummeted since the onset of the financial crisis, and the price has dropped to a third of what it was when it peaked in July.

Preparations for the dam were revived earlier this year at a time of record copper prices to address energy shortfalls affecting the country’s mining industry. The IFC is financing the feasibility study, while the World Bank had previously indicated that it was likely to support the project through a guarantee. At 750 MW, the dam would become the largest privately financed hydroelectric project in Africa, and its output would equal roughly three times that of the contentious Bujagali Dam in Uganda.

According to the World Bank, more than half of the electricity in the country serves the mining sector. At the same time, 98 percent of the rural population lacks electricity, a situation that the Kafue Dam is expected to do nothing to address.

Meanwhile, despite declining copper prices, the long anticipated Lumwana copper mine began production last week. Lumwana has received financial backing from the African Development Bank and the European Investment Bank, and will become the largest open-pit mine in Africa. It will require a large supply of power at a time when other mines have reduced production due to rationed power.

The delay on Kafue Dam is likely one of many projects that the IFC will put on hold as a result of the financial crisis. Some sources estimate that as much as 20 percent of new IFC projects will not get off the ground, as they are rendered unviable and project developers struggle to attract investors.

At the same time, declining metal prices have shifted the negotiating positions of resource-rich African governments with respect to mining companies, which until the onset of the crisis were eager to take advantage of record high prices. The government of the Democratic Republic of Congo (DRC) announced last week that it would reduce export taxes and royalty payments from mining companies in an effort to convince them to continue operations. Reuters reports that royalty rates would be reduced to just a tenth of their current level. This has generated concern that Zambia, which exploits a contiguous copper area with the DRC, might also offer discounted tax rates to copper companies. Earlier this year, Zambia unilaterally instituted a modest mining tax increase to rectify the unfair and unbalanced rates that the World Bank encouraged in the late 1990’s.



IFC pledges to increase commitment as mining sector is hit by economic downturn and low demand

In an interview with Reuters, Lars Thunell, head of the International Finance Corporation (IFC – the World Bank’s private sector division) committed to stepping up equity investments in the mining sector to support projects whose viability might be affected by low global demand. However, at a time when virtually all sectors of the global economy are experiencing declining investment, some question whether the use of scarce public funds to expand mining operations best serves the institution’s poverty reduction mandate.

Meanwhile, by all indications, the IFC is moving ahead with plans to invest $500 million in the Guinea Alumina Project, a massive joint venture led by BHP Billiton in western Guinea that would include a bauxite mine, alumina refinery, power plant, and port facilities. The investment, which includes $200 million from the IFC’s own account and $300 million leveraged from other investors, would represent the IFC’s largest mining investment ever. With an estimated $4.7 billion price tag, the project would also become one of the largest capital investments in sub-Saharan Africa. The project is expected to be submitted to the board of the IFC for approval on January 30, 2009.

Earlier this month, the African Development Bank (AfDB) announced that it had approved $450 million through various financial instruments for the project. That announcement came just days before Metal Bulletin revealed that the estimated production date would be delayed by two years to 2013. The article also suggested that the European Investment Bank and a number of export credit agencies are considering their own investments in the project.

While project promoters are touting the transformative benefits for Guinea’s languishing economy – it would boost Guinea’s processing capacity to turn bauxite into aluminum – the project has also raised eyebrows about the substantial governance risks involved. Guinea has long been one of Africa’s most corrupt countries, and the death of President Lansana Conté on December 22 after 24 years in power adds a new element of uncertainty to a situation that has deteriorated in recent years. Guinean unions staged a nationwide strike in early 2007, which was met with brutal repression that resulted in over 150 people killed. Protests continued as recently as October 2008 in the mining town of Boké – the site of the proposed Guinea Alumina refinery - where citizens blocked trains that transport bauxite to the coast while they lack access to basic services such as safe water and electricity.

While IFC prepares to present the Guinea Alumina Project to its board, Rio Tinto has announced that it is shelving its $6 billion Simandou iron ore project in Guinea, in which IFC has a 5 percent share. The project has endured a protracted legal dispute, in which earlier this month the Guinean government revoked half of the Simandou concession citing insufficient progress in exploration and sold it to one of Rio’s competitors.



Additional Articles


Note: The text of the IFIs in Africa News Briefing may be freely used providing the source is credited.

The Bank Information Center (BIC) partners with civil society in developing and transition countries to influence the World Bank and other international financial institutions (IFIs) to promote social and economic justice and ecological sustainability. BIC is an independent, non-profit, non-governmental organization that advocates for the protection of rights, participation, transparency, and public accountability in the governance and operations of the World Bank, regional development banks, and IMF.

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